The market is preparing for a perfect storm of bad news. The last concern? The imminent drama of the debt ceiling in Washington.
The United States hit its borrowing limit on Thursday, forcing the Treasury Department to start taking “extraordinary measures” to keep government open.
If no deal is reached, markets could crash (as they did the last time this happened in 2011) and the US risks having its credit rating downgraded again.
“From both an economic and a financial perspective, not raising the debt ceiling would be an absolute disaster,” David Kelly, chief global strategist at JPMorgan Funds, said in a report earlier this week.
Kelly added that “failing to raise the debt ceiling is the most immediate fiscal threat to the economy and markets in 2023” and that a deal was needed as soon as possible to reassure markets.
“The financial chaos would presumably eventually lead to some compromise in Washington. However, this may not happen soon enough to avoid a recession and could leave some lasting scars, including a permanent increase in the cost of financing US federal debt,” Kelly said.
That would be catastrophic news for the economy. And investors no longer shrug off negative headlines.
There is a saying on Wall Street that bad news for the economy is actually good news for the stock market and vice versa. That’s because investors often bet that gloomy headlines will eventually prompt the Federal Reserve and other central banks to cut interest rates and provide more stimulus that can help boost corporate profits…and equity prices. the actions.
But the big market sell-off on Wednesday and the continued slide on Thursday could represent a turning point for market sentiment. The Dow fell about 250 points, or 0.7%, in morning trading and has now given up its gains for the year. The S&P 500 fell 0.9% while the Nasdaq slid more than 1%.
After a promising start to the year, stocks have apparently taken a turn for the worse. Bad news can actually be bad news.
“We have hunkered down on expectations of a soft landing for the US economy,” Kit Juckes, chief global currency strategist at Societe Generale, said in a report on Thursday. “Take off the blanket and it feels cold.”
Yes, the Fed is now likely to raise rates “only” a quarter of a percentage point when it wraps up its two-day meeting on February 1 as inflationary pressures ease.
Still, the promise of smaller rate hikes and the possibility of a Fed pause later this year is no longer enough to counter mounting evidence that the US economy may be in a slump. .
Retail sales fell more than expected in December. Industrial production also fell unexpectedly last month, a sign of weakness in the manufacturing sector.
“A series of economic data releases … indicates that the economy is finally slowing more broadly, and that the most important consumer is becoming increasingly careful about spending,” said Quincy Krosby, chief global strategist at LPL Financial, in a report.
“Which just a few weeks ago would have seen markets cheering for weaker data…now it is judged more harshly and bad news no longer enjoys a warm welcome,” he added.
Earnings for the big banks have been mixed. Rising mortgage rates have already hit home demand. And several bank CEOs have warned that a recession is coming.
Market strategists at Evercore ISI stated in a report on Wednesday that “the market’s New Year’s rally is over” and that recent data reinforces a base case of a recession beginning in the second half of this year.